National Sections of the L5I:

The "permanent arms economy"

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The theory of the permanent arms economy (PAE), like the theory of state capitalism, has its roots in a rejection of Trotskyism.

It first made its appearance in The New International, edited by Max Shachtman, in 1944, in an article by W. J. Oakes (T. N. Vance). Tony Cliff brought it over to Britain and it made its first appearance in Socialist Review in 1957.

By the mid 1960s, Mike Kidron, editor of International Socialism, had declared that "imperialism ... is dying as reality and therefore as a useful concept."'

PAE was designed to replace the theory of imperialism and explain "western capitalism's stability and growth since the war".

Reformists argued the long boom was a result of Keynesian policies, state regulation, technological changes or the expansion of world trade. The IS disagreed and argued that it was to be found instead in the phenomenon of the "permanent arms budget".'

Arms spending by the major capitalist nations, it was argued, was a form of unproductive government expenditure, a form of waste. A growing portion of the governments' taxation revenues was siphoned off from the process of capitalist accumulation (i.e. not reinvested in productive activities) and spent on, among other things, arms. But why should this help prolong the life and vigour of capitalism?

Mike Kidron put it like this;

"As I understand it the key point at issue is whether it is or is not legitimate to segregate a waste sector from a productive sector and to impute to the latter, and to it alone, the dynamics of the capitalist system. If it is legitimate, a shift of resources of a certain mix from the productive to the waste sector could, in principle, prevent the value structure of capital in the productive sector from changing, or could change it in a benign direction, and so main tam or even augment the rate of profit."1

By Kidron's own admission the original theory of PAE was a piece of bourgeois economics4. The IS set about trying to "Marxise" the theory by analysing arms expenditure in terms of value theory and in particular arms spending as a form of "luxury" production within Marx's system.

A central component of Marx's theory of crisis centres on the tendency of the rate of profit to fall. This tendency is a function of the competitive compulsion to accumulate. More and more surplus value is invested into new technologies relative to that which is invested in hiring new workers; this is known as the tendency for the organic composition of capital to rise. This rising investment can increase productivity, lower costs and increase the mass of profits, which is why it is undertaken.

But a problem arises. Living labour (workers) is the only source of surplus value and this surplus has to be measured across a growing volume of capital invested in machinery and technology. Hence, the rate of profit has a tendency to fall if left unchecked by other trends.

The PAE theory stands or falls by the proposition, as stated by Kidron above, that some of the surplus value that originates in production "leaks" from the system and does not find its way back into the next round of capitalist accumulation. This then slows down the process of rising productive investments and slows down the tendency of the rate of profit to fall.

The SWP's case rests, in large measure, on a criticism of Marx. Chris Harman has recently said;

"In his (Marx) model value created in one round of production feeds back into accumulation in the next round, either as new means and materials of production or by providing for the consumption of value producing workers. He barely considered the impact on the development of the system of flows of value that did not feed back into accumulation."'

But since the twentieth century has seen a massive growth in unproductive expenditures advertising and war, for example, then:

"These all have the effect of using up value that would otherwise have been available for productive accumulation and which would, in that case, have increased the pressure for investment to grow much more rapidly than the productive labour forces and for profit rates to fall."6

In a primer text for new members Alex Callinicos has also argued that arms production makes:

"no contribution to further production, since they are paid for by surplus value which might otherwise have been reinvested" and "by removing some capital from the production of commodities the pressure which leads towards crises are relieved."7

Arms spending was held to account for as much as half of all gross capital formation in the 1960s and far outstripped other forms of unproductive spending. There was no question but that this spending was also more and more capital intensive, more and more technologically sophisticated. But since it was a form of luxury production it could not effect the determination of the rate of profit, according to Kidron. The implications were clear. As originally formulated, under the impact of the long boom, arms production was at the centre of this new, higher stage of capitalism:

"...arms production is the key, and seemingly permanent, offset to the tendency of the rate of profit to fall."8

And since arms production by one nation forces others to compete, the "system and the tendency becomes worldwide."9

The political economy of waste

Judged in the light of Marx's labour theory of value the PAE makes no sense. Since it was first championed by the IS (SWP) it has been subject to devastating criticism"10 The central objection is to the idea that arms spending is simply a "leak from" the system of capital accumulation and that, as a result, it cannot have an effect on the determination of the rate of profit. This is plain wrong. Marxists have long analysed the role that arms production plays within capitalism. Lenin and Luxemburg recognised that it played the same role as the export of capital to the colonies. It provided an outlet for surplus capital which could not be profitably invested in existing productive spheres. Since the state was the main purchaser of arms it also had the advantage for capitalism of providing a steady market "free of the vagaries and subjective fluctuations of personal consumption."11

In the pre imperialist epoch most taxation revenues were used to satisfy the unproductive consumption of the capitalist class. But it is a feature of the imperialist stage of capitalism (rather than a new stage) that it broadens the use of such revenues to offer the capitalist class new opportunities for accumulation.

The basic confusion at the heart of PAE is between unproductive and productive consumption. The SW believe that arms spending by the state is simply like the capitalists' spending on their own food and pastimes.

They believe that government tax on surplus value is simply a waste of surplus value, a drain that could be used to invest in production. But some of the taxation revenues also create surplus value. As Luxemburg understood, state revenues represent a new purchasing power and "it becomes interested in new products, in a special branch of production which does not cater for either the capitalists or the working class, and thus it offers capital new opportunities for creating and realising surplus value. "12

The state transforms the revenue from taxation into capital by investing it in the elements of production (raw materials, machinery, labour power). Arms are produced which embody surplus value created by the workers. If these then find a buyer at their price of production then the surplus value is realised.

It is completely irrelevant whether or not these commodities (arms) enter into a further round of production, as means of production and consumer goods destined for the working class do. Once the surplus value has been realised in a sale then this becomes distributed as part of the total social surplus value between various parts of the capitalist class just as much as the surplus value generated in the other departments of production.

It, therefore, enters into the general determination of the rate of profit. It has not leaked out of the system at all. There is thus no general and one way tendency for arms spending to arrest the decline in the rate of profit. The role of arms spending and production has to be judged from a different, more concrete, standpoint than this.

It is possible for arms production to offset the tendency of the rate of profit to fall (TRPF) providing certain conditions prevail. One would be if the overall organic composition of capital (0CC) was lower in this sector than elsewhere, thus lowering the average 0CC for capitalism as a whole. But anyone who remembers the Gulf War will realise that the arms sector is an especially high tech one. In addition, the spin off effect from this sector into that of consumer goods will have the effect of raising the average 0CC rather than lowering it.

The second circumstance whereby arms production could dampen the TRPF is if this sector enjoyed a higher rate of exploitation than the average so that it helped raise the average. But again this is unlikely since the overwhelming improvement in the rate of exploitation comes about due to improvements in lowering the value of the commodities that go into determining the value of labour power. Thus the PAE cannot explain the offsetting of the TRPF after the war or the long boom. Nor were its supporters able to explain why it failed to continue to operate during the seventies and the Second Cold War (1979 89), despite continued and even increased, arms spending by the superpowers.*

1 M.Kidron, "International Capitalism", in IS1:20 1965, p159

2 M. Kidron, "A Permanent Arms Economy" in IS1:28, 1967. Or, "The arms economy was the root cause of the long boom." as he said in Western Capitalism Since The War, London, 1969.

3 M. Kidron, "Two insights don't make a theory" ISI:100, July 1977, p7

4 ibid p6

5 C. Harman, "Where is capitalism going?", lS2:58, Spring 1993, p7. It should be stated at the outset,however, that this argument is not original. It was first put by Von Bortkiewicz, a Russian critic of Marx. According to Kidron he argued that "the organic composition of capital in luxury goods production had no part in determining the rate of profit." See Kidron IS 1:28 op cit.

6 ibid, p7

7 A. Callinicos, The Revolutionary Ideas of Karl Marx, London, 1983, p189

8 M. Kidron, IS 1:28 op cit p12

9 ibid, p12

10 See for example, E. Mandel, Late Capitalism, London, 1975 Chapter 9; Revolutionary Communist 3/4 November 1975.

11 Rosa Luxemburg, The Accumulation of Capital, quoted in E. Mandel, ibid p300.

12 ibid p283